Amelia Hughes is a commercial helicopter pilot who plans to offer two-hour helicopter tours to various venues from her home airport in Hamilton. Tours would focus primarily on Toronto and Niagara Falls. She estimates that she should be able to sell 500 tours per year.

Amelias accountant suggests that she use cost-plus pricing based on the total lifetime product cost to determine a price per hour for the new service. She plans to keep the helicopter for ten years and then retire.

Amelias costs are as follows: Fight operating costs:

Variable operating costs per hour: $300

Variable overhead operating costs per hour: $25

Fixed annual ground-related costs: $50,000 Selling and administrative costs:

Fixed sales, general and administration per year: $150,000

Variables sales, general and administration costs: $18 per hour

The cost of developing the tour business would be $250,000, and the cost of abandoning the tour business, including disposal of the helicopter, is $50,000.

Amelia would like to make a 10% markup over cost.

Required:

a) What hourly rate will Amelia charge using total lifetime product cost?

b) Amelia realizes that there is currently no one in this market, so she thinks she can charge a 25% markup for Years 1 through 3, but will have to adjust down to 10% for Years 4 through 10, as she thinks she will have competition by then. What will Amelia charge for Year 2?

c) Amelia decides that she wants to see what the price would be if she considered only the direct flight costs with a 60% markup.